Comment: Squaring the circle in UK-EU trade relations with a triangle

As a ‘hard’ Brexit looms, reviving TTIP could help bridge the gap between the EU, the UK and the US, argues Peter Chase.

As the United Kingdom edges towards a ‘hard Brexit’ in 2019, incoming United States president Donald Trump’s curious embrace of Brexit and the much-maligned but yet-to-be concluded US-EU Transatlantic Trade and Investment Partnership (TTIP) could help square the Brexit circle with a triangle.

The UK without the EU

After the UK leaves the EU, it will have “taken back control”. The other 27 EU members will no longer have a say in the laws governing products and services in the UK, or the operation of companies in its territory. But neither will the UK have a say in the making of EU laws.

No matter what arrangements the UK and the EU eventually agree, the UK will have joined what former US Ambassador to the EU C Boyden Cray called “the coalition of the excluded”. That coalition includes ALL other countries that choose to export to or invest in the EU, as none has a voice in the laws that affect their business there.

This regardless of whether they belong to the EU customs union like Turkey, are members of the European Economic Area (EEA) like Norway, have a special relationship with some 200 sectoral agreements like Switzerland, conclude an ‘ambitious’ free trade agreement, like Canada (CETA), or are just a ‘normal’ country benefiting from the World Trade Organization’s ‘Most Favoured Nation’ rules.

In every case, anyone who wants to sell to the EU must ensure its products or services meet EU rules, and all their investors are subject to EU laws.

Prime Minister Theresa May in her January 17 speech on Brexit should acknowledge that the UK decision to regain its ‘sovereignty’ means accepting that it in turn has no say in the EU’s sovereign decisions. She should also be clear that those decisions will affect UK exports to, imports from, and investments in the EU. The customs union, EEA, Swiss, CETA, WTO or any other model – by definition – will not be as good, economically, for the UK-EU trade and investment relationship as the existing arrangement.

If the customs union and EEA models are seen as ‘softer’, the UK is in for a ‘hard’ Brexit. This should, however, not be overdramatised. Even as the UK joins the “coalition of the excluded”, it can still sell to and invest in the EU. This is true even with the ‘hardest’ approach — the WTO model. UK producers would face new costs and significant administrative hurdles. They would need to pay the EU’s general customs and value-added taxes. The EU may require certifications showing they comply with EU rules, something that is heretofore assumed. But lots of companies in the US, Japan, China, Brazil and elsewhere manage these same difficulties.

Moreover, UK producers would do so from a more favourable position. Right now, laws regulating the products and services sold in the UK are the same as those that apply in the EU. May has said the UK will initially retain the substance of all these EU laws. Hence firms in the UK need not face any immediate regulatory barriers to products they export to the EU, or vice versa. The same is generally true for the sale of services, including financial, where the UK should quickly qualify for EU “equivalence” decisions.

The obvious answer for Her Majesty’s government and indeed for the EU is to negotiate a very deep and very comprehensive free trade agreement that eliminates duties, minimises, as much as possible, the administrative burdens of a trading arrangement, retains open government procurement, provides protections to investors, and, on the regulatory front, establishes sectoral mutual recognition and equivalence agreements between the UK and EU regulatory agencies that have been working closely together for decades. But achieving this in two years will be difficult, even if the EU is ready to work toward future arrangements after Brexit.

Which is where the US part of the triangle might come in.

Trump factor

President-elect Trump’s seeming embrace of Brexit is at odds with US policy since World War II, which saw a stronger, united and war-free Europe as in America’s deepest direct interest. Instead, Trump seems to want to facilitate the UK’s departure and even the EU’s break-up; he and others in Washington (and in London) talk seriously about concluding a US-UK free trade agreement as soon as possible.

There is an enormous political, and economic, difficulty with this: As long as the UK is a member of the EU, it is illegal for it to negotiate a separate trade agreement with anyone. If it flaunts that rule (which of course it can), the EU negotiators on the other side of the Brexit table will make any transition away from the UK’s largest market considerably more difficult.

At the same time, the EU – including the UK – and the US are in their third year of negotiating the comprehensive and ambitious TTIP covering all the market access issues noted above, significant regulatory cooperation with individual sectoral annexes, and rules on such things as customs facilitation, investment, labour and environmental protections. The two sides were unable to conclude the talks during President Obama’s term, in part as the Brexit referendum threw another wrench into the works. The negotiations are now, at best, on hold until the new US administration is in place.

Trump is not anti-trade per se. He is mercantilist, focused on US exports, and angry about the flood of “unfair” imports. In that sense he might see utility in TTIP. But his version may not be acceptable in Europe, as the new administration is likely to promote more Buy American requirements in its new infrastructure programme and Trump will have little use for the sustainable development provisions that are politically important in Europe.

Using TTIP to square the Brexit circle

But could a revived TTIP help square the Brexit circle?

At some point, the UK will be out of the EU. It will need to leave all existing EU trade agreements and replace them with new bilaterals, OR the EU and the other countries will need to revise them to include the UK as a separate third party. A triangle.

This is true of TTIP as well. But TTIP is under negotiation today, AND it is significantly more ambitious than any other trade agreement the EU (or UK) has negotiated. Whether explicitly or implicitly, the US and the EU could re-enter the talks under a Trump administration assuming the UK eventually would be a third party to TTIP.

The European Commission could not allow a member state (especially an exiting one) to be at the TTIP negotiating table, but it also doesn’t want a Trojan Horse when it briefs member states on the talks. London and Brussels could agree that the UK would voluntarily absent itself from the EU briefings, in exchange for an understanding that Washington would be “discussing” the details in TTIP instead.

The Brits, knowing they would eventually be parties to the deal, would become the bridge they are so often portrayed to be, pushing on both sides to adopt the most favourable terms. This could happen, for instance, by arguing in Washington to allow ‘fair’ European (and UK) firms to bid on US government contracts on a non-discriminatory basis, and ensuring the EU would give it and the US as open access as possible in return. Or by helping Washington understand the importance of ‘geographical indications’ for agricultural products in Europe — and the UK — while pressing in Europe for more agricultural market access.

This would allow the TTIP structure (market access, regulatory cooperation with individual sectoral agreements, rules) to be used to simultaneously craft what would also be a UK-EU FTA and a US-UK one. As in the Trans-Pacific Partnership agreement, many of the individual tariff phase outs, quotas and specific sectoral regulatory arrangements would be done bilaterally, US-EU27, US-UK and UK-EU27, with all those bilateral deals (which should be much more comprehensive and ambitious for the UK) being ready for inclusion in a final legal agreement.

If TTIP is finished before Brexit, the specific UK quota provisions could be built in, with the other bits added immediately upon formal completion of a Brexit deal. This would mean the UK leaving the US-EU agreement as such (as with all trade agreements), but in the TTIP case to be immediately brought back in.

The choreography for such an approach is complicated. But it would defuse the huge problems a US-UK deal would cause the Brexit talks. It would allow the UK to have more weight in its negotiations with Washington, and yet also give a major geopolitical reason for both the US and the EU to reach a truly ambitious agreement.

There is little good that comes with Brexit. But perhaps some of the downsides can of squaring that circle can be mitigated with a triangle that keeps the UK, EU and US closer together.

Peter Chase is Senior Fellow at the German Marshall Fund. Follow him on Twitter @peterchase

Opinions expressed in columns published by Borderlex are those of their authors only.